Zach Industries Ratio Analysis

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35.8 days 1.09 0.300 12.3 0-102 0.135 0.091 0.099 0.167 $3.10

"Based on a 365-day year and on end-of-year figures.

Financial statement analysis The financial statements of Zach Industries for the year ended December 31, 2009, follow.

: v; ' ; v! : - ■'y■. : f:"- n ^ y■.! ^ J.ïi1 :. L- ■- ' -. :",-' . ■;'.

Sales revenue - $160,000

Less: Cost of goods sold 106,000

Gross profits $ 54,000 Less: Operating expenses

Selling expense $ 16,000

General and administrative expenses 10,000

Lease expense 1,000

Depreciation expense 10,000

Total operating expense $ 37,000

Operating profits $ 17,000

Less: Interest expense 6,100

Net profits before taxes $ 10,900

Less: Taxes 4,360

Net profits after taxes $ 6,540

Zach Industries Balance Sheet Deeper 31,2009

'Assets'1

Cash $ 500

Marketable securities 1,000

Accounts receivable 25,000

Inventories 45,500

Total current assets ' $ 72,000

Buildings and equipment 90,000

Less: Accumulated depreciation 38,000

Net fixed assets $ 78,000

Total assets $150,000

Accounts payable $ 22,000

Notes payable 47,000

Total current liabilities $ 69,000

Long-term debt $ 22,950

Common stock" $ 31,500

Retained earnings $ 26,550

Total liabilities and stockholders' equity $150,000

"The firm's 3,000 outstanding shares of common stock closed 2009 at a price of $25 per share.

a. Use the preceding financial statements to complete the following table. Assume the industry averages given in the table are applicable for both 2008 and 2009.

Current ratio 1.80 1.84

Quick ratio 0.70 0.73

Inventory turnover" 2.50 2.39

Average collection period" 37 J days 36.5 days

Debt ratio 65% 67%

Times interest earned ratio 3.8 4.0

Gross profit margin 38% 40%

Net profit margin 3.5% 3.6%

Return on total assets 4.0% 4.0%

Return on common equity 9.5% 8.0%

Market/book ratio 1.1 1,2

"Based on a 365-day year and on end-of-year figures.

b. Analyze Zach Industries' financial condition as it is related to (X) liquidity, (2) activity, (3) debt, (4) profitability, and (5) market. Summarize the company's overall financial condition.

P2-24 Integrative—Complete ratio analysis Given the following financial statements

(below and on page 96), historical ratios, and industry averages, calculate Sterling Company's financial ratios for the most recent yean (Assume a 365-day year.) Analyze its overall financial situation from both a cross-sectional and a time-series viewpoint. Break your analysis into evaluations of the firm's liquidity, activity, debt, profitability, and market.

■ i-vM.*.'-'''Income Statement ;■'■'•</''v !

Sales revenue $10,000,000

Less: Cost of goods sold 7,500,000

Gross profits $ 2,500,000 Less: Operating expenses

Selling expense $300,000

General and administrative expenses 650,000

Lease expense 50,000

Depreciation expense ' 200,000

Total operating expense 1,200,000

Operating profits $ 1,300,000

Less: Interest expense 200,000

Net profits before taxes $ 1,100,000

Net profits after taxes $ 660,000

Less: Preferred stock dividends 50,000

Earnings available for common stockholders $ 610,000

Earnings per share (EPS) $3.05

Current assets Cash

Marketable securities Accounts receivable Inventories Total current assets Gross fixed assets (at cost)" 512,000,000 Less: Accumulated depreciation 3.000,000 Net fixed assets Other assets Total assets

Liabilities and Stockholders'Equity

S 200,000 50,000 800,000 950,000 $ 2,000,000

Current liabilities

Accounts payable4, $ 900,000

Notes payable 200,000

Accruals 100,000

Total current liabilities $ 1,200,000

Long-term debt (includes financial leases)c S 3,000,000 Stockholders* equity Preferred stock (25,000 shares, $2 dividend) $ 1,000,000

Common stock (200,000 shares at $3 par)d 600,000

Paid-in capital in excess of par value 5,200,000

Retained earnings 1,000,000

Total stockholders' equity S 7,800,000

Total liabilities and stockholders' equity $12,000,000

JThe firm has an 8-year financial lease requiring annual begjaning-of-year payments of $50,000. Five years of the lease have yet to run.

''Annual credit purchases of $6,200,000 were made during the year.

The annual principal payment on the long-term debt Is $100,000.

¿On December 31,2009, the firm's common stock closed at $39.50 per share.

.,' ',...;;■ "-.Historical and 'Industry Average Ratios for Sterling Company '.. . •* .' . .

Ratio y.'i

' Actual 2007

Actual 2008

-Industry average,

Current ratio

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